- EUR/GBP suck in familiar ranges as COVID-19 takes precedence.
- BoE measures unlikely to weigh too heavily, EZ nation’s curves flattening.
EUR/GBP has slid on Monday to present a fresh 24-day low in an extension of the March high’s sell-off having already made a 61.8% Fibonacci retracement of Feb’s rally to meet a prior resistance and support structure.
At the time of writing, EUR/GBP is trading at 0.8717 having travelled from a high of 0.8784 to a low of 0.8705, -0.54% on the day thus far. In thin holiday trade and at such a key level, the question from here is where next? Much of that question will boil down to the COVID-19 and how much longer Europe and the UK will be on an economic lockdown.
For the UK, now in its fourth week of partial lockdown, there are expectations that the government will announce this Thursday that it will need to extend the lockdown by weeks from which the original restrictions were put in place on 23 March, with the three-week period concluding last weekend. The virus is tearing through the UK population and on Sunday, the UK’s total number of hospital deaths linked to coronavirus reached 10,612. The restrictions permit essential travel to work, but the streets are a ghost town and due to the government’s helicopter money, the majority of the population is staying at home, only heading out once a day or exercise and food shopping and adhering to social distancing.
The BBC reported that “speaking ahead of the Easter Bank holiday weekend, Mr Raab said it was still “too early” to lift lockdown restrictions, insisting they would need to stay in place until evidence showed the UK had moved beyond the peak of the virus.”
When it comes to the value of the pound, markets are taking into account the economic fallout of the lockdown measures and judging by the report by the National Institute of Economic and Social Research (NIESR) think-tank suggesting 25% of the UK economy could be lost by the summer due to the current controls in place, prospects for sterling are bearish. However, the measures taken by a well respected Bank of England should help to buffer financial stability and the UK economy, a potential plus for sterling despite the political uncertainties, with UK PM Borish Johnson out of action and recovering at the Chequers, probably for the news few weeks. In any case, markets will presume that the extraordinary measure taken by the BoE and UK government won’t last beyond 2020.
EZ flattening the curve
Meanwhile, we have seen some early signs that some curves are starting to flatten in Europe. After a fall in daily death tolls, Spain and Italy, two countries hard-hit by the virus, are set to begin easing lockdown measures. In Spain, for instance, Prime Minister Pedro Sanchez has said the formal lockdown will probably continue into May, but some restrictions may be lifted to breathe life into a paralysed economy. “Any step towards de-escalation of such an intense lockdown must be done with extreme caution,” Deputy Prime Minister Pablo Iglesias told local TV channel TVE.
“With early signs that some curves are starting to flatten, Europe is very slowly turning its attention to exit strategies from the lockdown. Austria was first to lay out a clear timeline, and markets will be watching to see how long until other countries follow, for a better gauge on the depth of economic damage,” analysts at TD Securities explained.
Euro-area finance ministers have reached agreement on a regional bailout package to support countries hardest hit by the COVID-19 crisis, however, markets do not see it as enough and we have not seen the depth of this crisis yet. the ECB could be expected to ease further, analysts at TD Securities argued, “with another €500bn in QE expected to be added to the existing €750bn PEPP later this year.”
Given the levels in cable, with bulls meeting a 61.8% retracement of the March drop, and with EUR/USD meting a 50% mean reversion of the latest range, plus fundamentals boiling down to uncertainty pertaining to COVID-19, EUR/GBP is expected to move sideways as the US dollar remains in demand for its safe-haven qualities. If 0.8620/0.87 holds 0.8850 could be on the cards while below 0.8620 opens risk to 0.8550.